Taxes, management and succession thoughts for architects

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Bright ideas. Smart solutions.

www.gma-cpa.com

Taxes, management and

succession thoughts

American Institute of Architects

Potomac Valley Chapter | June 12, 2012

David Goldner – background

• CPA (1980)

• Master’s in taxation (1983)

• CFP (Certified Financial Planner 1989)

• CVA (Certified Valuation Analyst 1994)

• Managing partner (90 person CPA firm)

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Taxes – §179D deduction

• Energy Policy Act of 2005 –

179D introduced

– Section 179 allows the

expensing of property

• EPAct 2008 update –

enhanced usability of

deduction for architects and

engineers

Taxes – §179D deduction

• When you reduce total energy and power costs by 50% or

more compared to a reference building – qualifies for a

tax deduction of up to $1.80/SF

• Modeling is required to compute the deduction under

ASHRAE 90.1-2001 baseline = $1.80

Lighting HVAC Building

envelope

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Taxes – §179D deduction

• Generally the property owner gets the deduction

• Special rule for public property

– If the building is owned by a municipality or

government organization, they can assign the

tax deduction to you, the architect or

engineer (boo)

Taxes – §179D deduction

• Eligible properties – projects completed in the

last three years

– New construction

– Remodels / retrofits

– Additions

– Property placed in service between 2006-2013

– 30,000 SF or more

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Taxes – §179 deduction

• Eligible properties

– Municipal or government-owned

• Courthouses

• HUD housing (4 stories or more)

• Airports, museums, libraries

• Transportation centers

• County-owned hospitals

• Convention centers

– Schools

• K-12 and higher education

Taxes – §179D deduction

• Case study – high school

– Qualifying area: 485,830 SF

– Qualifying system: lighting,

HVAC, envelope

– Deduction / SF: $1.80

– Total 179D deduction:

$874,494

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Taxes – §179D deduction

• Case study – museum

– Qualifying area: 80,377 SF

– Qualifying system: interim

lighting

– Deduction / SF: $0.43

– Total 179D deduction:

$34,562

IRS requirements

• Third-party certification report

– Unrelated PE or contractor

– Relevant reduction

requirements statement

– Field inspections statement

– DOE-approved software

– Perjury statement

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IRS requirements

• Obtain signed allocation letter from

government owner; it must include: • Designer

• Owner of building

• Cost of property

• Date placed in service

• Amount of the deduction allocated to designer

• Penalties of perjury declaration

(see sample allocation letter)

Taxes – §179D deduction

• IRS requirements – third-party certification report

– Performed by unrelated PE or contractor

– Relevant reduction requirements statement

– Field inspections must be performed after property

placed in service

– DOE-approved software

– Perjury statement

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Taxes – §179D deduction

• Tax wise – accounting procedures and tax filings

– Taken as “other deduction”

– Firm structure dictates how deduction is used (S-corp,

C-corp, etc.)

– Reduced benefit, carry forward or back options available

– Tax planning opportunity with your CPA

– Amend past three years’ tax returns

– Allocation letter and certification report should be kept on

file and a copy sent to your CPA; this does not need to be

submitted with amended return

Taxes – §179D deduction

How the deduction works

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Taxes – §179D deduction

§179D process overview

Tax Armageddon – the issues

• Ordinary tax rates are rising

• Capital gains and dividend tax rates increasing

• Estate taxes

• Alternative Minimum Tax hits BIG

• Two percent payroll cut will end

• Tax credits will be slashed

• New high earner “excise tax” on passive income

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Tax Armageddon – planning

• 50% bonus depreciation is in its last year

• Credits still available for many types of new hires

• Estate tax planning – once in a lifetime planning

opportunity for very wealthy

• Plan to recognize capital gains in 2012

• Maximize your ordinary income in 2012

Management

Accountability is King

implement accountability to

improve performance

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Management – accountability

• Starts at the top – partner accountability

– Do you have a formal system in place?

– Remove artificial harmony in your group!

– Develop a non-negotiable firm commitment statement

– Establish a partner goal setting process

– Tie partner goals to compensation

Management – accountability

• Successful partner accountability plans:

– Have SMART goals – specific, measureable,

attainable, realistic and timely goals

– Are simple and understood by all partners

– Reward results, not efforts

– Incent partners to work in areas of strength

– Require clear communication and understanding of

results by each partner

– Align partner goals to the firm’s strategic initiatives

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Management – accountability goals

• New business won – specific reward of a

percent of new business as collected

• Success growing a niche area – reputation of

the firm, speaking engagements, awards won

• Development and management of staff –

increased efficiency

Management – accountability goals

• Leader in technological innovation – what gets

implemented

• Individual working goals – hours worked,

business managed and realization goals

achieved

• 60-70% of comp fixed – 30-40% reward based

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Succession planning – valuation

• Valuing an architectural firm

– Net asset value (no goodwill)

• Cash A/R WIP equipment less debt

– Earnings based methods

• Weighted average earnings

• Excess earnings

• Discounted future earnings (Can this be estimated? )

– Market value

• Discretionary earnings

• EBITDA

Succession planning – valuation

• Cash basis financial statements

• Receivables and work in progress

• Restrictive agreements among partners

employees grievance actions

• Depth or leadership

• Can you survive to the next generation?

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Succession planning

• Personal goodwill

– Business carries name of individual

– Name recognition of individual

– Referrals to individual

– Closeness of contact

– Importance of personal service

Succession planning

• Institutional goodwill

– Overall practice reputation

– Effective workforce in place

– Practice-wide marketing

– Referrals to practice rather than individual

– Repeating as opposed to one-time revenue stream

– Practice owns intellectual property

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Succession planning

• Architectural practices tend to sell in the range of

1.75 to 3 times discretionary earnings,

converting to an estimate of 50% of gross

revenue (per David DeJong)

• BV market data reports – 13 sales (median)

– Revenue – 1,240,000

– 55% of revenue

– 1.8 x discretionary earnings

Questions?

David Goldner, CPA, CFP, CVA

dgoldner@gma-cpa.com

410.685.5512

www.gma-cpa.com